Reference no: EM13567269

Pooria Corp just completed another successful year, as indicated by the following income.

      For the Year Ended

                                                                  December 31, 2012

Sales revenue                                                  $1,250,000

Cost of goods sold                                              700,000

Gross profit                                                        $ 550,000

Operating expenses                                              150,000

Income before interest and taxes                       $ 400,000

Interest expense                                                    25,000

Income before taxes                                           $ 375,000

Income tax expense                                            150,000

Net income                                                          $ 225,000

Presented here are comparative balance sheets:

  December 31

                                                                   2012                2011

Cash                                                          52,000        $ 90,000

Accounts receivable                                 180,000           130,000

Inventory                                                230,000           200,000

Prepayments                                           15,000             25,000

Total current assets                               $ 477,000        $ 445,000

Land                                                       $ 750,000        $ 600,000

Plant and equipment                                700,000           500,000

Accumulated depreciation                     (250,000)           (200,000)

Total long-term assets                            $1,200,000        $ 900,000

Total assets                                            $1,677,000      $1,345,000

Accounts payable                                      $ 130,000       $ 148,000

Other accrued liabilities                               68,000            63,000

Income taxes payable                                     90,000           110,000

Total current liabilities                                 $ 288,000        $ 321,000

Long-term bank loan payable                       $ 350,000       $ 300,000

Common stock                                               $ 550,000        $ 400,000

Retained earnings                                            489,000           324,000

Total stockholders' equity                              $1,039,000       $ 724,000

Total liabilities and stockholders' equity           $1,677,000    $1,345,000

Other information is as follows:

a.Dividends of $60,000 were declared and paid during the year.

b.Operating expenses include $50,000 of depreciation.

c.Land and plant and equipment were acquired for cash, and additional stock was issued for cash. Cash also was received from additional bank loans.

The president has asked you some questions about the year's results. She is very impressed with the profit margin of 18% (net income divided by sales revenue). She is bothered, however, by the decline in the company's cash balance during the year. One of the conditions of the existing bank loan is that the company maintains a minimum cash balance of $50,000

Required

1. Prepare a statement of cash flows for 2012 using the direct method in the Operating Activities section.

2. On the basis of your statement in part (1), draft a brief memo to the president to explain why cash decreased during such a profitable year. Include in your explanation any recommendations for improving the company's cash flow in future years.